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Just when you thought things couldn't get worse for Netflix,
here's a tidbit of information that could have significant
consequences for the company: in a Q&A session at the
Goldman
Sachs Communacopia conference on Wednesday (replay here), CFO David Wells
conceded that while cancellations due to the price increase
announced in July accounted
for most of the 1 million downward revision in
end of quarter subscribers, the change has alsoadversely impacted new
subscriber acquisitions (though he declined to quantify by how
much). I believe this is the first time a Netflix executive has
acknowledged a double whammy resulting from the price increase -
both higher than expected churn and a slowdown in additions.

This is exactly the issue I called out last week in "Netflix Q3 Subscriber Loss Could
be Churn AND Acquisition Related,"noting that although many
observers immediately concluded that the Q3 revision was entirely
churn related, the reality is that a deviation from expected
additions is an equally important factor in determining the final
September 30th subscriber count. In his remarks, Wells attributed
the impact to word of mouth and the news coverage the pricing
change received (both of which presumably deterred some amount of
prospective subscribers from signing up), but also added that
"we're still digging in to understand it."

I'm not surprised by the acquisition slowdown, as Netflix has
been a huge beneficiary of its loyal and enthusiastic subscribers
recommending the service to others, a trend that accelerated as
the streaming offering became stronger over the past 2 years,
connected devices proliferated, and the buzz factor grew. I have
no idea whether Netflix ever quantified exactly how significant
subscriber recommendations were in driving new acquisitions, but
common sense suggests that if the company angered a material
segment of its subscriber base (as it did with the price change),
their enthusiasm to recommend Netflix to friends would falter.

Looking ahead, a big question to ask is if the price increase
caused an acquisition slowdown, what impact might the Qwikster DVD split be having
on acquisitions during these last 2 weeks of Q3? Is it possible
that Netflix is going to post a Q3 subscriber number southof the 24 million reforecast,
as the Qwikster impact ratchets churn and further slows
acquisitions? Going a step further, what will the Qwikster
split's impact be on Q4 acquisitions (and of course churn)? When
the price increase was originally announced, Netflix made a point
of saying it expected Q4 would be back on track and could well be
the company's first billion dollar revenue quarter. All of that
seems completely out the window now, meaning Q4 performance is
anyone's best guess.

The key takeaway here is that there are multiple - and often
inseparable - drivers of subscriber retention and acquisition.
Actions like an onerous price increase that may only directly
impact current subscribers and therefore be perceived as
containable, can quickly turn into an out-of-control brush fire
that harms brand image and new subscriber acquisitions as well.
All of this is playing out in a very public way for Netflix, as
the company grapples with the consequences of its actions that
have thrown it into completely uncharted territory well into
2012.